Federal Tax Law: The Problem with Casualty Losses and Gradually Inundated Properties
Congress Has An Opportunity to Proactively Revise the Federal Tax Code for SLR Property Losses
Here’s the scenario:
It is 2010. Mr. Smith has a house situated in a sea level rise vulnerable area. His intent is to keep the property in his family for decades to come.
Twenty years later, he finishes paying off his mortgage, and is “free and clear.” Gradually, through the years, however, Mr. Smith has repeated flooding which manifests itself as water intrusion from beneath the ground.
The problem escalates each year. No matter what steps Smith takes to deal with the issue, parts of his property become increasingly unusable.
Within 40 years of purchasing the property, he cannot afford to keep bailing it out. His cherished property is no longer usable and his dreams are crushed. The only party interested in the property is the state, since ocean waters have evicted Smith’s and his family.
What does the Internal Revenue Code offer in the form of relief? The answer is probably not a “casualty loss” on Smith’s tax return.
According to the Internal Revenue Service, “A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.” The casualty event must be unanticipated.
Mr. Smith has a big problem. Unless the current definition of casualty loss is expanded to accommodate the consequences of gradual sea level rise, he is out of luck. Absent a hurricane or major weather event such as a tropical storm, invasive waters most likely fall under the category of “progressive deterioration.” Sea level rise is anticipated.
SLR does not occur all at once, but over a period of years, increasing inches of ocean water will degrade the property and produce a retrogression of property value.
If loss of real property does not fit within an IRS defined “casualty,” what exactly is it? That’s for Congress to decide.
In the most susceptible and defenseless areas, this is not just an academic question. People in Satellite Beach, Florida may want answers to this question sooner than later. According to the South Florida Sun Sentinel on April 20, 2014, “The city eventually may have to abandon some homes along the oceanfront and move toward multi-family housing complexes on higher ground, said John Fergus, a member of the city's planning advisory board.”
Before that happens, affected landowners will most likely be looking to the tax laws to see what help they can get when they permanently leave their properties. They may not find an adequate answer.
Adaptation to sea level rise is not confined to the "built environment." It also applies to the federal tax laws and the halls of Congress. Lawmakers have an important opportunity: Equitable revisions, based upon sea level rise, to the nation’s tax statutes and regulations.